Validity of Unstamped Arbitration Agreement

Case Description

On 18 September 2015, Indo Unique Flame Ltd. (Indo Flame), a coal washing company (Indo Unique) won a tender to work for the Karnataka Power Corporation Ltd. (KPCL). In furtherance of this work, Indo Flame furnished bank guarantees in favour of KPCL. 

On 28 September 2015, Indo Flame entered into a sub-contract with NN Global Mercantile Pvt. Ltd., a retail trade company that transports coal from a washery to a stockyard. Clause 9 of this sub-contract provided for a security deposit and Clause 10 was an arbitration clause. As per Clause 9, NN Global furnished the bank guarantee in favour of Indo Unique.

On 6 December 2017, owing to work differences, KPCL invoked the bank guarantee made by Indo Unique. On 7 December 2017, Indo Unique invoked the guarantee furnished by NN Global. NN Global refused to pay the bank guarantee and filed a suit in the Nagpur Commercial Court. 

In response, Indo Flame filed an application seeking the reference of the dispute to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996 (Arbitration Act). NN Global opposed the application on the ground that the bank guarantee was a separate contract without arbitration clause and therefore, its invocation was fraudulent.

On 18 January 2018, the Commercial Court rejected Indo Flame’s application and held the arbitration clause did not cover the bank guarantee.

On 18 July 2020, Indo Flame filed a Writ Petition before the Bombay High Court arguing the dispute was under the scope of an arbitral tribunal and not the Court. NN Global argued amongst other things, that the arbitration agreement was not stamped and therefore Clause 10 of the sub-contract could not be invoked to refer the dispute to arbitration. 

On 30 September 2020, the High Court reversed the commercial Court’s decision and held that the arbitration application was maintainable as there was an arbitration agreement between the parties.

In 2020, NN Global filed a Special Leave Petition against the High Court’s judgment. A three-judge bench comprising D.Y. Chandrachud, Indu Malhotra and Indira Banerjee heard the appeal. The main issues before the bench were: 

1. Whether the arbitration clause of an unstamped document is enforceable, and 
2. Whether the invocation of guarantee being fraudulent is an arbitrable dispute? 

NN Global relied upon the findings of the Court in SMS Tea Estates v Chandmari Tea Co. Pvt Ltd. (2011) and Garware Wall Ropers v Coastal Marine Construction (2019). In SMS Tea Estates, the Court had observed that an unstamped arbitration agreement within a commercial contract was void. In 2015, the legislature inserted Section 11(6A) to the Arbitration Act and limited the Court’s power to determining only the “existence of an arbitration agreement”. Despite this, in Garware, the division bench of the Court held that an unstamped arbitration agreement was invalid.

On 11 January 2021, the bench set aside the High Court’s judgment but noted that the view in SMS Tea Estates and Garware was incorrect. Therefore, they referred the issue of the validity of an unstamped arbitration agreement to a larger bench of five judges.

In April 2023 , a bench comprising Justices K.M. Joseph, Ajay Rastogi, Aniruddha Bose, Hrishikesh Roy and C.T. Ravikumar in a 3:2 majority,held that an unstamped arbitration agreement was void and unenforceable. Writing the majority opinion, Justice Joseph affirmed the views in SMS Tea Estates and Garware. In the dissent, Justices Rastogi and Roy, cautioned against judicial intervention in arbitration cases. They opined that an unstamped arbitration agreement was valid at the pre-referral stage. The judgment resulted in serious criticism. 

In September 2023, a five-judge bench headed by CJI Chandrachud with S.K. Kaul, Sanjiv Khanna, B.R. Gavai and Surya Kant were hearing a curative petition in the case of Dharmaratnakara Rai v Bhaskar Raju (2020). A three-judge bench of CJI S.A. Bobde and Justices B.R. Gavai and Surya Kant in Dharmaratnakara had held that an unstamped agreement with an arbitration clause could not be acted upon by the Court. The bench hearing the curative petition also took note of the NN Global decision to be reconsidered, and referred the case to a seven-judge bench. 

A seven-judge bench comprising of D.Y. Chandrachud and Justices S.K. Kaul, Sanjiv Khanna, B.R. Gavai, Surya Kant, J.B. Pardiwala, and Manoj Misra began hearing the case on 11th October 2023. 

The petitioners argued that the majority view in NN Global was incorrect. Under Section 11(6A), the Court’s power was confined to determining the existence of an arbitration agreement and not its validity. The respondents argued that the larger bench did not have the jurisdiction to hear the case. They also argued that an arbitration agreement could not be separated from the main contract.

On 12 October 2023, the bench reserved judgment in the case. Two months later on 13 December 2023, the Bench upheld the validity of an unstamped arbitration agreement. They stated that not stamping was a curable defect that did not render the agreement as a whole void.